FDA Decision Postmortem: Ortec International
If you have any comments, questions, or
thoughts on this article or on anything to do on biotechnology or medical
technology, please feel free to email me at prugg@tradingmarkets.com.
On
Tuesday July 17, Ortec International
(
ORTC |
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PowerRating) received FDA
advisory panel approval of its new product (CCS) to treat the donor sites of
burn patients. It was the company’s
first attempt at obtaining the FDA’s blessing and allowed it to get one foot
into a potentially $1 billion market. As
I mentioned in my FDA
Alert on Monday, the company initially plans to market the product for burn
patients as decreed in its FDA application. However,
it has a plan to eventually penetrate the more lucrative market of diabetes and
guide its product toward the treatment of leg ulcers.
First
of all, to get FDA advisory panel approval of anything in this current hostile
environment is an accomplishment for any biotech company.
Lately, many high-profile companies have had their new drug applications
shot down or delayed in the wake of an overworked, overburdened, leaderless FDA
suffering from acute safety neurosis. The
recent casualty list reads like a Who’s Who in the pharmaceutical and
biotechnology arenas: Praecis Pharmaceuticals
(
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(
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(
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Genelabs
(
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(
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FDA regarding their new drug applications.
In addition, many others have their applications on hold. Let’s face it, at this point in time, any company waiting on a new drug
application decision from the FDA must first, wait a little longer since the
drug approval process is not unfolding on time…and second, be a bit nervous,
given the carnage that has occurred over the last several months.
The
recent approval and stock behavior of Ortec’s new treatment for burn patients
illustrates several points that tie old lessons to new ones. As I mentioned in my
FDA
Alert, the FDA was already familiar with
Ortec’s product and I believe this minimized any overzealous safety thoughts
the agency might have experienced while making its decision. In
this case, familiarity does not breed contempt. The
other important point to emphasize again is the fact that Ortec went after a
smaller, more defined market on its first approach to the FDA. The company is saving its broad stoke for the more lucrative market after
it gets its foot in the door.
This
is in stark contrast to Genentech’s
(
DNA |
Quote |
Chart |
News |
PowerRating) recent setback with the FDA over its new
monoclonal drug for the treatment of asthma. Initially, Genentech marketed its new drug Xolair to treat asthma and
allergies in adults and children. The
FDA saw this as too much too soon, especially for a new class of drug aimed at
such a large patient population. In
addition, children hold a special place in the heart of the FDA. A company needs to have a near-perfect new drug if it intends to use it
to treat a very common childhood disease (in this case, asthma) that already has
effective treatment methods approved. Genentech,
since receiving its delay letter from the FDA, has scaled back its new drug
application and is targeting only adults with its new asthma drug.
Now, what about the behavior of the stock price before and
after the FDA decision? Ortec
International is a very small-cap company with no serious revenue-generating
products on the market. It is
rather innocuous company, with a very low profile and not-so-sexy product. The product is not trying to cure cancer or treat heart disease, just
help burn patients heal faster. The
company is trying to enter a very limited market in a rather anonymous way,
somewhat invisible to institutional investors. By getting to the FDA’s advisory panel under the investor radar screen
the way Ortec and other small cap companies have, investors usually have a small
window to enter and exit the stock.
For
instance, Ortec’s stock price several weeks before the FDA meeting remained
rather motionless, with no great moves in either direction despite the influence
this upcoming decision had on its future growth potential. On Monday,
July 16, the day before the meeting, the stock price made a nice 11%
move in anticipation of the FDA’s decision. At this point, were investors telling us something about the upcoming
decision? It also helped having the
Dow and Nasdaq up nicely that day as well. The FDA then handed Ortec
its positive decision after the bell on
Tuesday. On Wednesday, July 18, with the
news of the decision over the wires, the company’s stock price promptly
declined 11% in the wake of a down Dow and Nasdaq.
This is a classic case of buy on anticipation and sell on news.yes”> Unfortunately, these listed conditions equate to uncertainty
in investors’ eyes and uncertainty today means “sell.”
Investors have only a short window to take positions on a company like
Ortec and move on to the next trade, particularly in such a volatile market
environment that exists today.
Now,
if you looked at how FDA decisions affected the bigger-cap, higher-profile
biotech companies with new drug applications in more lucrative disease markets,
a different chart scenario seems to exist for investors. Look for this in my next trading lesson in August.
Good
luck,
I have been
investing/trading in medical and biotechnology stocks for years. The one common
theme is that this is a high risk/reward endeavor. When you are correct, many
times you are richly rewarded. When you are wrong, you can be badly punished.
Please keep this in mind and hedge/protect yourself appropriately when
trading/investing in these stocks.